Alibaba Discounts TVs to Woo 193 Million Chinese Online

June 12 (Bloomberg) -- Alibaba Group Holding Ltd. is taking
a new approach to boosting sales online: paying its customers to
cut their prices.

China’s biggest e-commerce company plans to spend 300
million yuan ($47 million) on summer promotions for goods
ranging from iPhones to televisions to air-conditioners sold
through its Tmall. The website, which operates a marketplace
similar to EBay Inc.’s, is subsidizing its vendors’ deals for
their customers.

The program steps up Alibaba’s battle with online rivals
360Buy.com and Tencent Holdings Ltd. for China’s Internet
shoppers, estimated at 193 million by Boston Consulting Group.

“They are taking money out of their own pockets and
helping clients slash their prices to steal users from 360Buy,”
said Michael Clendenin, managing director of research company
RedTech Advisors. “It’s a very aggressive move.”

Under the program, which is focused on electronics, vendors
on Tmall can apply to the Alibaba unit for subsidies to make up
for discounts. Alibaba may also pay rebates straight to
consumers.

Luring shoppers to Tmall is a key part of Chief Executive
Officer Jack Ma’s plan to tap into booming online sales in
China. Alibaba is seeking debt and equity financing to help fund
its planned $7.1 billion share buyback from investor Yahoo! Inc.

“Today people think of Alibaba as an e-commerce company,
an Internet empire,” Ma said in a June 7 interview in Beijing.
“It’s not an empire, it’s an ecosystem.”

Ma said the company could sell shares in an initial public
offering within five years, adding that he is confident Alibaba
can withstand new challenges. His Chinese e-commerce rivals, he
said, have mostly copied American Internet business models.

“Copycats never survive,” he said.

‘Best Position’

Tmall accounted for 37 percent of Chinese business-to-consumer e-commerce in the first quarter, more than double the
17 percent held by 360Buy.com, the No. 2 player, according to
research company Analysys International. Suning Appliance Co.,
Tencent, and Amazon.com Inc. each have about 2 percent, the
researcher said.

“Alibaba is probably in the best position right now of
anybody - they have the platform in place, and the critical mass
of eyeballs,” said Ben Cavender, an analyst at China Market
Research Group in Shanghai, which advises retailers.

China has more consumers buying online than the U.S., and
the value of the country’s e-commerce market may triple, to $364
billion, by 2015, Boston Consulting Group predicts. With more
Chinese consumers shopping online, RedTech expects e-commerce to
account for 5.3 percent of the nation’s retail sales this year
versus 4.9 percent in the U.S.

Online Growth

“The online retail market is getting to be a really big
economy by itself, and it’s going to grow much faster,” said
Alicia Yap, head of Internet research at Barclays Capital in
Hong Kong.

The ability of online retailers to offer cheaper prices may
help them attract cost-conscious consumers as China’s growth
weakens, said analyst Cavender. China’s economy expanded 8.1
percent in the first three months of this year, the fifth
quarterly deceleration.

“Even if there is an economic slowdown, you’d expect the
e-commerce companies will be affected less than the brick-and-mortar stores,” Cavender said.

Gome, Suning

Success for Alibaba will increase pressure on chains such
as Suning and Gome Electrical Appliances Holding Ltd., which are
revamping their online businesses to retain customers amid
sliding earnings and share prices as e-tailers keep gaining.

Suning says it will offer new products on its Yigou e-commerce site and step up promotions. The company also has a 200
million yuan program to reimburse price differences for
customers who find cheaper deals elsewhere.

And Gome has agreements to sell products on the website of
E-Commerce China Dangdang Inc., China’s biggest Internet book
seller. Gome last month said spending on its online business may
hurt profit margins. The retailer has agreed to sell 40 percent
stakes in its Kuba and Xinruimei e-commerce units to a company
controlled by its founder, Huang Guangyu.

“We are feeling the white heat of competition from
traditional and online retailers,” Gome Chief Financial Officer
Fang Wei said in a conference call.

Gome’s two e-commerce sites, Coo8.com and Gome.com.cn, have
advantages over online-retailers in procurement, logistics and
delivery, the company said via e-mail.

Alibaba’s net income jumped seven-fold to $237 million in
the quarter ended Dec. 31, compared to a year earlier, according
to a regulatory filing by Yahoo last month. Revenue rose 88
percent to $1.02 billion, according to the filing.

The company is the second-biggest generator of online
advertising revenue in China, behind only search engine Baidu
Inc., thanks to sales of keywords and banners, according to
Analysys.

Alibaba’s business model is similar to EBay, the world’s
biggest online marketplace. 360Buy.com and DangDang more closely
resemble Amazon by focusing on selling goods themselves rather
than hosting external vendors.

Less Risk

Alibaba is more profitable than rivals because it doesn’t
stock merchandise itself, according to RedTech’s Clendenin. That
means Alibaba has less risk of a squeeze on profit margins from
a price war.

“They are essentially just an online real-estate company,
selling space on their servers,” Clendenin said. “It doesn’t
take any inventory risks.”

While Alibaba’s original consumer marketplace, called
Taobao, lets small businesses sell to consumers for free, Tmall
serves larger companies and charges fees and takes commissions.
Dell Inc. and Fast Retailing Co.’s Uniqlo clothier are among the
brands that use Tmall to reach higher-end Web shoppers.

Competitors have responded with their own investments in
online sales. Tencent, China’s biggest Internet company, said it
plans to spend $1 billion on its e-commerce unit. 360Buy.com and
DangDang are expanding their marketplace divisions in tandem
with their main online retail operations. And 360Buy.com said it
will offer a 1 billion yuan promotion program for consumers.

“The financial strength of Alibaba means they are in a
position to invest in marketing their various platforms,” said
Chen Shousong, an e-commerce analyst at Analysys in Beijing.
“They are going to be doing what they can to fight off the
competition and build a big lead.”